N.K. Sodhi, Presiding Officer -
(1.) WHETHER the Appellants connived with Narendra Prabodh Ganatra and his related/connected entities (referred to hereinafter as the Ganatra group) to manipulate the price upwards of the scrip of Gemstone Investments Ltd. (hereinafter called the company) to off -load their stake at higher prices and thereby violated regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (for short the regulations) is the primary question that arises in this appeal. Facts as they emerge from the record and which have not been disputed by the parties may first be stated.
(2.) THE Appellants are the promoters of the company which was incorporated in the year 1994 and they acquired it in November 1998 from the erstwhile promoters after making a public announcement under regulation 11(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (for short the takeover code). However, they did not make the necessary disclosures under the takeover code. Presently, all the Appellants except Appellant No. 1 have exited from the company and they do not hold any shares. Appellant No. 1 holds 3,61,070 shares and continues to be a promoter. The shares of the company are listed on the Bombay Stock Exchange Ltd. Mumbai and the audited profit for the financial year 2005 -06 was Rs. 17.40 lacs and for the financial year 2007 -08 it was Rs. 17.20 lacs. However, for the financial year 2006 -07, the company reported a loss of Rs. 2.70 lacs on an equity capital of Rs. 3 crores. The Securities and Exchange Board of India (for short the Board) carried out investigations in the scrip of the company for the period from August 28, 2006 to August 21, 2008 as it was during this period and thereafter that the Ganatra group made large purchases of shares of the company from the market. It was also during this period that the Appellants sold their shares though they effected sales only up to July 3, 2007. It is on record that the Appellants held 25,17,630 shares of the company (83.92 per cent) out of the total issued share capital of 30 lac shares. The Appellants started selling their shares with effect from August 29, 2006 and the last sale was executed on July 3, 2007 and the sales were in the price range of Rs. 3.08 to Rs. 28.50 per share of the face value of Rs. 10. Sushila P. Shah, one of the Appellants sold 20,000 shares on August 29, 2006 in the price range of Rs. 3.08 to Rs. 3.23 and thereafter the sales were gradually made at prices higher than these. It is also established on the record that out of 24,80,480 shares sold by the Appellants, 18,42,119 shares (74.26 per cent of the total shares sold by the Appellants) were purchased by the Ganatra group which, admittedly, consists of 17 persons whose details are given in Annexure II to the show cause notice. The rest of the shares were purchased by others. Investigations also revealed that after November 2005, trading in the scrip on BSE commenced only on August 28, 2006 and the price rose from Rs. 2.94 on August 28, 2006 to Rs. 45.45 on November 12, 2007 and thereafter it came down to Rs. 14.85 on April 15, 2008 and again increased to Rs. 51.80 on August 21, 2008. It is clear from the record that the Ganatra group consistently traded in the scrip from August 28, 2006 to August 21, 2008 and this group mainly made purchases and the price went up to Rs. 51.80 per share on August 21, 2008. It is alleged that the Ganatra group entered into circular/reverse trades which accounted for 50.33 per cent of the market volumes during the period from March 20, 2007 to August 21, 2007 which resulted in increase in price and volumes. However, we are not concerned with these allegations in the present appeal since the Ganatra group is not in appeal before us and the impugned order is not directed against that group. On the conclusion of the investigations, the Board decided to initiate adjudication proceedings against the Appellants.
(3.) ON the basis of the facts found during the investigations, the Appellants were served with a show cause notice dated June 4, 2010 alleging that they acted in collusion with Ganatra group when they sold their shares as aforesaid. The primary reason for alleging collusion is that majority of the shares sold by the Appellants had been purchased by the Ganatra group. It is also alleged that the Ganatra group "acting in collusion, consistently traded in the scrip from August 28, 2006 to August 21, 2008 and increased the price of the scrip from Rs. 2.94 (on August 28, 2006) to Rs. 51.81 (on August 21, 2008)". It is further alleged that "Once the price of the scrip had gone up, then the promoter/Company related entities started selling in the market after December 13, 2006". The show cause notice also states that "the scrip was not traded from August 31, 2006 to September 24, 2006 and during that period there were 93 buy orders (57 buy order placed by some entities of Narendra Ganatra group) placed by 12 brokers for their 21 clients for 10,12,200 shares (for 974000 shares orders placed by Narendra Ganatra group). These buy orders remained unexecuted due to non availability of sale orders in the system." The details of the trading done by the Ganatra group were provided to the Appellants in Annexure IV to the show cause notice. Another charge that is levelled against the Appellants is that even though they made a public announcement in accordance with the takeover code in 1998 when they acquired the company, Appellants 1 to 4 did not make the necessary disclosures thereunder and thereby violated regulation 7(1A) of the takeover code. Appellants 1 to 6 were also required to make the necessary disclosures under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (for short the insider regulations). Since they failed to make these disclosures they have been charged for violating regulations 13 (3) and 13 (4) of insider regulations. The Appellants filed a reply to the show cause notice denying all the allegations. They did not seriously dispute that they had not made the necessary disclosures under the takeover code and also under the insider regulations. On a consideration of the material collected during the course of the investigations and the enquiry held by the adjudicating officer and after affording a personal hearing to the Appellants, the adjudicating officer came to the conclusion that the Appellants had connived with the Ganatra group to manipulate the price and volumes of the scrip of the company with a view to off -load their stake at higher prices and thereby violated regulations 3 and 4 of the regulations. He also found that Appellants 1 to 6 had failed to make the necessary disclosures under the takeover code and the insider regulations. Accordingly, by his order of September 6, 2010 he imposed a monetary penalty of Rs. 6 crores on the Appellants for violating regulations 3 and 4 of the regulations and a consolidated penalty of Rs. 5 lacs on Appellants 1 to 6 for violating the takeover code and the insider regulations as detailed in his order. Appellants 1 to 4 have been levied a penalty of Rs. 1 lac each whereas Appellants No. 5 and 6 have been imposed a penalty of Rs. 50,000/each. It is against this order that the present appeal has been filed.;